The 6 Critical Decision Factors For Outsourcing Payroll

Payroll Outsourcing: A Decision Making Guide

Thanks to its well-established history and relative ease of implementation, payroll outsourcing remains a popular choice for organizations of all sizes; and as Martyn Hart (chairman of the UK’s National Outsourcing Association) sees it, this popularity is only going to increase. “What we are seeing now is the growing maturity in users of outsourcing, while those that haven’t considered it before are also getting in on the act”, says Hart. Indeed, with the potential cost savings as well as the perceived relief from the compliance burden, it’s not surprising that the choice appears an easy one to make. Be that as it may, the process of outsourcing payroll is not the right fit for every organization. Unfortunately, with associations and service providers on one side (praising the virtues of outsourcing) and software vendors on the other side (attempting to sell businesses in- house automation), it can be difficult to navigate through the pros and cons of this type of selection to reach the right decision. As such, we’ve put together this article to highlight the factors every organization should consider when considering the argument of outsourcing the payroll function.

Payroll Outsourcing Factor #1: Accuracy & Accountability

If there’s one thing in which employees demand 100% accuracy, it’s their paycheck; and yet, as in any regular and repeated process, mistakes will inevitably be made. Further, as the size of the organization grows, the cost of these errors for an in-house payroll team (both in time and money) will likely become increasingly more significant. As an HRWorld article points out though, “[When outsourcing payroll,] if paychecks are delayed or paperwork is mishandled, it's the payroll services provider's responsibility to fix things”. Add to this the fact that generally outsourcing payroll functionalities can also result in lower error rates and the potential efficiencies are all but doubled. On the other hand, The Resource Group, in an article in support of managing payroll using Microsoft Dynamics GP software, suggests that the in-house option offers greater control; with the option to review and catch errors before paychecks go to employees. Ultimately, as it pertains to accuracy and accountability, the decision becomes a question of the capability of the payroll team (whether in-house or outsourced) and the organization’s comfort with delegating responsibility.

Payroll Outsourcing Factor #2: Consistency of Service

While an advantage of in-house payroll can be that the organization recruits and directly manages the payroll team’s performance, these activities do come with a time and money price tag for supervisors. Equally, the resource available for managing the payroll schedule will inevitably vary with vacations, absences due to sickness, and the general turnover of personnel. Payroll outsourcing places these people management issues with the provider. Further, as HRWorld states, “You also won't have to spend time helping new hires understand your business's payroll system.”

Payroll Outsourcing Factor #3: Workforce Peculiarities and Variations

Workforces don’t stand still; they evolve and change over time in response to the needs of the business and the state of the economy. Some organizations may have regular influxes of seasonal workers, requiring a temporary increase in payroll resources. For an in-house function, sourcing temporary yet expert personnel may be problematic, but for an outsourcing provider it’s merely an issue of workload allocation. As well, different businesses may require different and specialized payroll knowledge and the cost of developing, and more importantly, maintaining that knowledge in-house can be prohibitive. Further, as ResourceNation’s Buyer Guide to Payroll elaborates, “Some businesses offer flexible savings accounts, cafeteria plans, or retirement account contributions [and] many industries require specific types of insurance payments or taxes. A payroll company has the necessary experience to guide [an organization] through what could be a complicated process.”

Payroll Outsourcing Factor #4: Data Location

Payroll management involves the use and storage of employees’ personal data, including social security numbers, salary information and banking details. The Resource Group notes, “Many businesses simply feel more comfortable using an in-house payroll solution because of the sensitivity of payroll data”. Likewise, many employees may be uncomfortable with the concept of their personal information “leaving the building” and being stored in external facilities. While security measures at outsourced facilities have greatly increased over the past few decades, it’s important to remember that oftentimes security concerns are more about perception than reality. As such, with any payroll outsourcing strategy, there must a degree of due diligence with regard to the provider’s information security policies, as well as the management of stakeholder expectations and fears.

Payroll Outsourcing Factor #5: Compliance

Regardless of stringency or geographic location, any country’s labor laws are likely to have a significant impact on payroll management. For example, in the United States alone, legislation such as the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) place mandatory record-keeping and reporting requirements on employers; with state labor laws mandating even further compliance responsibilities. In a 2010 AccountancyAge survey, over 30% of organizations cited, “Maintaining sufficient expertise in payroll legislation and system knowledge,” as the greatest risk to the administration of payroll. This expert knowledge can be a time-consuming burden for any in-house payroll team; whereas an outsourced provider can (and should) be up to date on all relevant payroll-related statutes and regulations.

Payroll Outsourcing Factor #6: Cost

The abovementioned AccountancyAge survey also found that the “most important benefits of outsourcing payroll were perceived to be increased cost-effectiveness at 42.4%” and that over half of those respondents already outsourcing their payroll had leveraged headcount reductions as a result. In addition, a PricewaterhouseCoopers report (The Hidden Reality of Payroll and HR Administration Costs) noted that, “organizations using in-house solutions for payroll… spend on average 9% more (for mid-size organizations 100–1,000 employees) and 27% more (for large organizations over 1,000 employees) than those that use outsourced solutions”. While these cost savings are sizeable (especially when considered in the context or organizational size), organizations should take care not to be overly tempted by this factor alone.

Deciding Whether to Outsource Payroll – The Bottom Line

While somewhat limited in its scope, the 2010 AccountancyAge Payroll Outsourcing survey (consisting of 270 mid-sized and large organizations) found that more than 80% of respondents were open or even enthusiastic about the idea of outsourcing payroll; and 60% had already outsourced the function to an external provider. With these figures in mind, for most organizations the consensus seems to be that outsourcing payroll can (and should) be an option on the table. However, weighing against the potential benefits of outsourced solutions on the decision-making scales is the degree of control and security over the payroll process which some organizations may be unwilling to relinquish. As always, these decisions should be approached through careful examination of the potential benefits in relation to the organizational impact that will come with the decision.

In a 2010 AccountancyAge survey, over 30% of organizations cited, “Maintaining sufficient expertise in payroll legislation and system knowledge,” as the greatest risk to the administration of payroll."